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ETF Specialist

Cheap Exposure to Small-Value Stocks

This may not be the deepest small-value fund available, but its low expense ratio makes it one of the best bargains in the category.

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Small-cap value stocks have historically represented the best-performing segment of the U.S. equity market.  Vanguard Small-Cap Value ETF (VBR) offers comprehensive exposure to these stocks for a razor-thin 0.09% expense ratio, making it the cheapest fund in the category available to individual investors. It invests in the cheaper half of the U.S. small-cap market and weights its holdings by market capitalization. Market-cap-weighting incorporates market information about the relative value of each holding and helps mitigate turnover. However, it may also reduce the fund's exposure to holdings as they become cheaper because this often coincides with a decline in market capitalization.

This fund is not for the faint of heart. Small-cap stocks tend to be considerably more volatile than their large-cap counterparts. Many small-value stocks also carry high business risk and do not enjoy sustainable competitive advantages to cushion earnings during tough environments. Over the past decade, the fund was about 33% more volatile than the S&P 500. In light of these risks, this fund is most appropriate as a small holding for long-term investors with a relatively high risk tolerance.

Alex Bryan has a position in the following securities mentioned above: VBR. Find out about Morningstar’s editorial policies.